Are you in the process of starting a business? You may have heard about the importance of signing a shareholder agreement when partnering with shareholders.
Do you know what shareholders agreements are? Is signing one really that important?
Find out in this article.
The purpose of shareholders’ agreements
A shareholders’ agreement is a contract between the different shareholders of a company used to establish a clear procedure to follow in the case of unforeseen circumstances.
A shareholders’ agreement also formalizes a company’s general by-laws, structure and operations. Additionally, it establishes the extent of shareholders’ commitments to the company.
Why is signing the shareholders’ agreement important?
A shareholders’ agreement must be signed because it avoids legal disputes and misunderstandings between shareholders in the event of unexpected situations.
For example, if one of your shareholders dies but nothing is specified in a shareholders’ agreement, the deceased’s shares will go to his heirs instead of being redistributed to other shareholders. This can complicate your corporate taxation and organizational structure.
Anticipating all possible situations is therefore necessary so that you have a plan of action ready at all times. Common examples of unforeseen situations can include:
- A shareholder wants to sell their shares
- A shareholder goes bankrupt
- A shareholder is fired
What to include in a good shareholders’ agreement
A good shareholders’ agreement must include some key elements, which take the form of clauses and terms and conditions.
Other than the previously mentioned information and elements, there are other types of clauses you may include in your shareholders agreement. Here are some examples.
The right to practice
A right to practice, also called the piggyback clause, protects minority shareholders in the event of a third-party buyout. Specifically, it gives small shareholders the right to resell their shares to a third party at the same price and under the same conditions as majority shareholders.
The non-compete clause
The non-compete clause protects incorporated businesses by prohibiting shareholders from investing in any other competing business.
The right of first refusal
The right of first refusal allows shareholders who wish to leave the company to resell their shares to other shareholders before offering them to third parties. Among other things, this clause helps maintain proportional ownership of the company's shares.
Start your company right with a shareholders’ agreement
In conclusion, shareholders agreements provide shareholders with appropriate steps to take in the event of unforeseen situations. This avoids related legal and tax complications and protects the company and its shareholders.
Need more information on taxation or the incorporation of a business in Quebec? At T2inc, our tax accountants can give you expert advice based on the needs of your business.
Get a free quote today!
Frédéric Roy-Gobeil
CPA, M. TAX
As President of T2inc.ca and an entrepreneur at heart, I have founded many start-ups such as delve Labs and T2inc.ca. A former tax specialist at Ernst & Young, I am also a member of the Ordre des comptables professionnels agréés CPA and have a master's degree in taxation from the Université de Sherbrooke. With a passion for the world of entrepreneurship and the growth mindset, I have authored numerous articles and videos on the industry and the business world, as well as on accounting, taxation, financial statements and financial independence.
